GAIA

Gaiam, Inc. (GAIA)

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Gaiam, Inc. (GAIA)

Q4 2007 Earnings Call

March 10, 2008 4:30 pm ET

Executives

John Mills - IR at Integrated Corporate Relations, Inc.

Jirka Rysavy - Chairman and CEO

Vilia Valentine - CFO and Treasurer

Lynn Powers - President

Analysts

Mark Argento - Craig-Hallum Capital

Lloyd Walmsley - Thomas Weisel Partners

Presentation

Operator

At this time, all participants are in a listen-only mode. (Operator Instructions)

Now, I'd like to turn the meeting over to Mr. John Mills. Sir, you may begin.

John Mills

Thank you. Good afternoon, everyone, and welcome to Gaiam's fourth quarter and full year 2007 Earnings Call. The following constitutes a Safe Harbor statement under the Private Securities Litigation Reform Act of 1995.

Except for the historical information contained herein, the matters discussed in this call are forward-looking statements that involve risks and uncertainties including but not limited to general business conditions, integration of acquisitions, the timely development of new businesses, the impact of competition, and other risks detailed from time to time in the company's SEC reports.

The company does not undertake any obligation to update forward-looking statements. On the call today representing Gaiam is Jirka Rysavy, Chairman and CEO; Lynn Powers, President, and Vilia Valentine, CFO.

Now, I'd like to turn the call over to the company's Chairman and CEO, Mr. Jirka Rysavy. Go ahead, Jirka.

Jirka Rysavy

Thank you, John, and welcome everyone to our fiscal year 2007 conference call. And I am very pleased to say it was another very good year and quarter. Revenue for the year which ended December 31, 2007 increased 20% to $263 million from $219 million in 2006. Internal growth rate was 17.5%.

Our results improved in all aspects. Gross margin increased. Most expense lines as a percentage of revenue decreased in spite of increased expenses related to our community.

Operating income increased 85% to $10.5 million from $5.6 million a year ago. Net income increased 51% to $8.5 million from $5.6 million in 2006. EPS increased 48% to $0.34 from $0.23 during last year. And depreciation and amortization for 2007 was $12.3 million.

For the fourth quarter, revenue increased 12.4% to $81.8 million from $72.8 million in the same quarter of last year. With the portion of revenue received by end of the third quarter, as we announced in our last call, our internal growth rate for the second half was 19.7%.

Earnings per share for the quarter was $0.17, and depreciation and amortization $3.7 million. During 2007, we generated $13.4 million in cash from operation compared to cash used of $0.5 million during the last year. And after 2.5 million shares repurchased in the year, we ended the year with $66 million in cash and no debt.

According to Nielsen's VideoScan in 2007, our US market share in DVD in the fitness/wellness category increased to 49.4% from 44.7% of last year.

In 2007, we strengthened on our online community by acquiring Zaadz, LIME Media and majority ownership in Conscious Enlightenment, and also became an exclusive provider of paid subscription services and ecommerce for Care2, which is a social networking site with about 7.5 million members. Subsequent to the yearend, we also purchased remaining ownership in Conscious Enlightenment.

Our pre-tax loss from the community during the fourth quarter was approximately $1.7 million or about $0.04 per share. To see our community, you can go directly to gaia.com or you can go to gaiam.com, and go to the bottom and click on the subscription tab.

As of March 1, we had over 200,000 subscribers who contributed over $2 million in subscription revenues during the month of February. Subscriptions are between $3 and $21 per month.

Subsequent to yearend, we also filed Form S-1 for an IPO for our sole subsidiary of Real Good Solar, divested all of our magazine businesses which we acquired with the purchase in Conscious Media, and initiated a restructuring of our UK subsidiary.

The rest of our international market, including Canada and Japan, were converted to licensing agreements. Licenses are between 10% and 25% of the product net revenues. We also acquired SPRI, a marketer of professional fitness products. Including these acquisitions, divestitures and reporting internal sales as licensing, we expect our revenues for 2008 to be approximately $300 million.

Now, Vilia will give you some more on the numbers, and then Lynn will give you a business overview on strategy for the next year. Vilia?

Vilia Valentine

As Jirka mentioned we are extremely pleased with our financial results for 2007. We achieved double-digit revenue growth, improved our operating margins and generated strong cash flow from operations. For the full year 2007, our revenue grew by $43.5 million to $262.9 million, an increase of 19.8% from $219.5 million in 2006. Revenues generated by our direct-to-consumer segment increased $25.8 million or 20.5% to $151.4 million during 2007 from $125.7 million during 2006. This increase reflects the continued success of our direct marketing programs and from businesses acquired over the last year.

Revenues from our business segment increased $17.7 million or 18.9% to $111.5 million during 2007 from $93.8 million during 2006, reflecting our success in international markets. Overall, gross margins remained strong at 64% of revenue. Solid margins coupled with revenue growth contributed to a $28.1 million increase in gross margin dollars from $140.3 million in 2006 to $168.4 million in 2007.

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